Privatizations equal power and money

Privatizing a company doesn’t have to be complicated. You just need to follow some basic and general rules for it to not only be successful but also capable of achieving the goals that are expected from such a process. There are not many — in fact, there are just three of them.

Three basic rules …

First: The only criterion for choosing a winner is price.

Second: Paradoxically, price maximization is not the goal of the procedure.

Third: There must be no other conditions connected to the sale of the state property such as required future investments, levels of future production, limits on asset disposal for certain periods of time, etc.

The government must accept that privatization does not mean it can preserve the current state of the industry or realize fantasies about the possible development of an industry. In other words, it is not the goal to find the „final“ owner. There is no one „final“ owner in a market economy. Even the most successful companies sell assets and change business lines routinely. Simply, privatization is about finding the first private owner as opposed to the previous public one. Nothing more, nothing less.

These rules may not seem ambitious but various Czech governments have consistently failed to follow them for years. To be able to privatize and not surrender to the power of the money extracted from the enterprise and the flattery of buyers is the real litmus test of a government.

Unfortunately, most governments, including recent Czech ones, privatize because they need resources to cover holes in their budgets. Privatizations under such circumstances are mostly proof of fiscal incompetence and are likely to violate the rules.

Also important is discarding the notion that a privatization is just a part of government business. Deregulation of the economy and of privatized industries is of the same importance. Privatization of a protected monopoly does not mean any change for the better for anyone.

… that governments constantly fail to obey

And how did the last four Czech governments (that is to say socialist ones) do from this point of view? They did not pass the test of economic wisdom. It would be difficult to find a privatization that obeyed even one of the above rules.

A few examples: Transgas and regional gas distribution companies were privatized in 2002 as a whole with a petrified monopoly position and pages of conditions.

The privatization of ČEZ and regional electricity distribution companies the same year did not succeed because the government asked too much even when a de facto monopoly was offered. A few months later the same government sold regional distribution companies to ČEZ for half the price.

Lignite mining companies from north Bohemia were an even more intriguing story. First it was proposed to sell them outright, almost for free, to their managers in early 2002. Fortunately, that proposal did not go through.

A year later the government tried to organize some kind of quasi-contest with stringent conditions that clearly favored their political cronies. The government succeeded in selling the smaller of those companies, Sokolovská uhelná, to its manager, who had close ties to the then-Prime Minister Vladimír Špidla, now a European Union commissioner.

Another company, Severočeské doly, is now being offered again without any contest to the ČEZ, a favorite of every Czech government. In the privatization of petrochemical giant Unipetrol, it took two attempts (one in 2002 and the other in 2005) with the same result. The winner was always Andrej Babiš (Agrofert) and his partners, even though there were other contenders offering more money for the government stake.

Engineering company Škoda Praha was transferred into the hands of ČEZ for free as compensation for alleged damages. Another engineering company, Škoda Plzeň, was used as part of an ill-designed attempt to bail out some select companies then in bankruptcy proceedings. The result was a fire sale to a well-connected financial group. Costs of the whole project were borne by the state.

The same conditions existed in the privatization of the Czech banking industry, which cost hundreds of billions of crowns (total costs are not yet known). Moreover, most of those costs were caused by failing to privatize banks earlier in the first place.

In short, privatizations get complicated when so much money is at stake and so many temptations are in place, as is usually the case. Economic wisdom is an unwanted companion, at least for politicians who are in charge. This is really an unfortunate situation because privatization of any company is an easy task.